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Bank of England November 2011 Inflation Report House of Commons Treasury Committee Bank of England November 2011 Inflation Report Oral and written evidence 28 November 2011 Sir Mervyn King, Governor, Paul Fisher, Executive Director, Markets, Dr Ben Broadbent, and Dr Martin Weale CBE, external members of the Monetary Policy Committee, Bank of England Ordered by the House of Commons to be printed 28 November 2011 HC 1675 Published on 13 January 2012 by authority of the House of Commons London: The Stationery Office Limited £0.00 The Treasury Committee The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration, and policy of HM Treasury, HM Revenue and Customs and associated public bodies. Current membership Mr Andrew Tyrie MP (Conservative, Chichester) (Chairman) Michael Fallon MP (Conservative, Sevenoaks) Mark Garnier MP (Conservative, Wyre Forest) Stewart Hosie MP (Scottish National Party, Dundee East) Andrea Leadsom MP (Conservative, South Northamptonshire) Mr Andy Love MP (Labour, Edmonton) John Mann MP (Labour, Bassetlaw) Pat Mcfadden (Labour, Wolverhampton South East) Mr George Mudie MP (Labour, Leeds East) Jesse Norman MP (Conservative, Hereford and South Herefordshire) Teresa Pearce (Labour, Erith and Thamesmead) David Ruffley MP, (Conservative, Bury St Edmunds) John Thurso MP (Liberal Democrat, Caithness, Sutherland, and Easter Ross) Powers The committee is one of the departmental select committees, the powers of which are set out in House of Commons Standing Orders, principally in SO No 152. These are available on the Internet via www.parliament.uk. Publication The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at www.parliament.uk/treascom. The Reports of the Committee, the formal minutes relating to that report, oral evidence taken and some or all written evidence are available in printed volume(s). Additional written evidence may be published on the internet only. Committee staff The current staff of the Committee are Chris Stanton (Clerk), Lydia Menzies (Second Clerk), Jay Sheth, Peter Stam, Antonia Brown (on secondment from the Bank of England), Renée Friedman (Committee Specialists), Lara Joseph (on secondment from the FSA), Phil Jones (Senior Committee Assistant), Steven Price and Baris Tufekci (Committee Assistants) and Nick Davies (Media Officer). Contacts All correspondence should be addressed to the Clerk of the Treasury Committee, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5768; the Committee’s email address is [email protected] List of witnesses Monday 28 November 2011 Page Sir Mervyn King, Governor, Paul Fisher, Executive Director, Markets, Dr Ben Broadbent, and Dr Martin Weale CBE, external members of the Monetary Policy Committee, Bank of England Ev 1 List of written evidence 1 Report to the Treasury Committee from Sir Mervyn King, Governor of the Bank of England Ev 19 2 Report to the Treasury Committee from Paul Fisher, Executive Director, Markets, Bank of England Ev 20 3 Report to the Treasury Committee from Dr Martin Weale CBE , External Member, Monetary Policy Committee, Bank of England Ev 21 4 Letter from Sir Mervyn King, Governor of the Bank of England Ev 22 cobber Pack: U PL: COE1 [SO] Processed: [03-01-2012 12:39] Job: 017636 Unit: PG01 Source: /MILES/PKU/INPUT/017636/017636_o001_th_TC 28 11 11 Corrected.xml Treasury Committee: Evidence Ev 1 Oral evidence Taken before the Treasury Committee on Monday 28 November 2011 Members present: Mr Andrew Tyrie (Chair) Michael Fallon Mr George Mudie Mark Garnier Jesse Norman Stewart Hosie Teresa Pearce Andrea Leadsom Mr David Ruffley Mr Andrew Love John Thurso Mr Pat McFadden ________________ Examination of Witnesses Witnesses: Sir Mervyn King, Governor, Bank of England, Paul Fisher, Executive Director, Markets, Bank of England, Dr Ben Broadbent, and Dr Martin Weale CBE, external members of the Monetary Policy Committee, Bank of England, gave evidence. Q1 Chair: Good afternoon, Governor. Good Sir Mervyn King: Beyond the one-year horizon, we afternoon, other members of the MPC. have not made significant changes to our growth rates Sir Mervyn King: Good afternoon, Chairman. in the forecast in the second and third years. They are largely unchanged. So we have a period of a soft patch Q2 Chair: Can I begin by asking you about growth over the first year, with weaker growth, but then we in the eurozone? Everyone is now suggesting that expect some bounce-back in the second and third growth is well down, and is going to remain well years, as before. down on what it would otherwise be, both in terms of out-turn and prediction. What proportion of that do Q6 Chair: So you are implying a resolution to the you estimate is caused by the eurozone crisis? eurozone crisis, somehow? Sir Mervyn King: If you go back to the projections Sir Mervyn King: No, we don’t know. Indeed, we we made in August, obviously we do not make a point were very careful to say that— forecast; it is a fan chart. The whole of that distribution has been revised down— Q7 Chair: I have seen that in the text. Sir Mervyn King: The extreme events associated with Q3 Chair: Looking at the central rate. developments in the euro area are simply not in the Sir Mervyn King: For growth over the next 12 fan chart; it is impossible to quantify them. months: in the first year of our forecast, growth has been revised down across the board by over 1 Q8 Chair: In making that assessment yourself, are percentage point. That is a very big reduction. I would you an optimist or a pessimist that the eurozone is say that the bulk of that can be attributed, directly or going to get through this crisis without fragmentation? indirectly, to a changed perception about Sir Mervyn King: Well, you have to define what circumstances in the euro area: directly, through lower optimism and pessimism mean in that context. exports from the UK to the euro area; and indirectly, through lower asset prices and lower wealth—share Q9 Chair: I have described it as fragmentation with prices have fallen and credit spreads are also higher, that being on the pessimistic side. because the funding costs of our banks, as well as Sir Mervyn King: That is something which we have those in the euro area, have risen. If you put all those not made a judgment on. It will depend on the politics things together, the bulk of the downward revision can in the euro area, which you are better placed to decide be attributed ultimately to news since August about than we are. what is happening in the euro area. There are some other sources of news—clearly there are signs of Q10 Chair: Maybe I should ask an economic slowing in the world economy as a whole—but the question to get the ball firmly back in your court. Do bulk of it is the euro area. you think that the Greek economy can recover at current exchange rates? Q4 Chair: When you say “the bulk”, are you talking Sir Mervyn King: Let me not base it on one economy. about 51% or 99%? Let me make a more general statement, which is that Sir Mervyn King: I am not going to give a precise underlying this problem is a crisis of current account percentage, but it is well over 51%—it is the bulk imbalances. Germany and the Netherlands have very of it. large trade surpluses. Many economies in the south, including Greece, have large trade deficits. The Q5 Chair: And looking forward? question is: how can they get back to a point when cobber Pack: U PL: COE1 [E] Processed: [03-01-2012 12:39] Job: 017636 Unit: PG01 Source: /MILES/PKU/INPUT/017636/017636_o001_th_TC 28 11 11 Corrected.xml Ev 2 Treasury Committee: Evidence 28 November 2011 Sir Mervyn King, Paul Fisher, Dr Ben Broadbent and Dr Martin Weale CBE these can be financed and, ultimately, the debt inflation, and the stability of the banking system at serviced? those times. What we have seen is that the private sector, since the Sir Mervyn King: As I said, there are some painful summer, has indicated pretty clearly that it does not adjustments to be made whatever the scenario as the want to finance these current account deficits. That euro crisis develops. Therefore, the fact that very large has left Governments to finance the deficits— potential credit losses have been built up prior to the primarily the euro area Governments. Given the scale crisis beginning means that there will have to be a of the debts which have been built up to the rest of rebalancing between both creditors and debtors. The the world and some of the periphery countries, it is idea that only debtors will pay the burden of this is very hard to see how just making further loans to mistaken; creditors will have to accept some of the those countries will actually resolve the problem. burden, too. How that is shared, how it plays out, how During the transition period in which they regain serious it is, is almost impossible to know. competitiveness, which is clearly crucial to having any sustainable path for those countries—they have to Q15 Jesse Norman: Would it be better for the UK find a way of regaining competitiveness—those for a euro-area default to be inside the euro rather current account deficits will need to be funded, I than outside? suspect, largely by transfers rather than by loans. Sir Mervyn King: I do not want to make any What markets are looking for is a clear signal from statements to that effect, no.
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